What Is a Balance Sheet?

 The balance sheet is a financial report that shows a company's assets, liabilities and owners' equity at a specific point in time. The word "balance" in the name refers to the fact that a company's total assets should always equal its total liabilities and shareholders' equity. The balance sheet can reveal a lot about your business's liquidity, solvency and efficiency. For example, a balance sheet that shows more in liabilities than in assets would raise questions about the ability of your business to pay for its near-term operating needs or future debt obligations.

The basic structure of a balance sheet is a column on the left side listing assets, and a column on the right listing liabilities and owner's equity. The total of the two sides should match, but this is not necessarily easy to accomplish. There are many different formats of a balance sheet, depending on the reporting standards and methods used in a country. The example below is formatted according to International Financial Reporting Standards (IFRS), which are used by companies outside of the United States. It lists accounts in order of liquidity, from most liquid to least. If your practice uses accrual-based accounting, the order of accounts may be reversed, as in the example below.

Liquidity is the ability of an asset to be converted to cash within a reasonable time frame. It is also a key element of a company's ability to meet its current debt obligations and make distributions to shareholders. To calculate liquidity, a company's accountants divide the current assets by the current liabilities. The result is a liquidity ratio that gives an indication of the ability of the company to cover its short-term debt obligations.

A balance sheet lists all the tangible and intangible assets that a company owns, along with all its debts and the money it owes to investors or shareholders. The underlying concept behind a balance sheet is that the company pays for its assets by borrowing money as a liability (liabilities) or by taking value from the shareholders or investors (equity).

Assets are listed on a balance sheet in order of their liquidity, with more liquid items such as cash and accounts receivable listed first and non-current assets such as inventory last. Some common asset classifications include prepaid expenses, fixed assets and marketable securities. Fixed assets generally are recorded at historical cost, not at market or fair value.

Similarly, liability accounts are recorded on the balance sheet at historic cost rather than market or fair value, although this can change over time if a company adopts new accounting methods. Other major types of liabilities include short-term loans, long-term debt and accounts payable.

Investors and lenders want to see a healthy balance sheet that shows the company has more assets than debt. A company with more assets than debt can easily meet its upcoming obligations, make distributions to shareholders and grow its business. If a company has more liabilities than assets, however, it could struggle to stay in business, especially if its accounts payable are growing faster than its current assets.Steuerberater Hattingen